How Trump killed Obama's vaunted trade deal - and why it could affect the US for decades

Allan SmithFeb 8, 2017, 15:36 IST

Donald Trump.Getty Images

President Donald Trump's most consequential foreign policy move so far happened with the stroke of a pen on his first full weekday in office.

But as experts put it, the effects of his decision to formally withdraw the United States' from the landmark Trans-Pacific Partnership trade agreement will be felt for years, if not decades, to come.

The president's announcement, though largely symbolic in nature, cemented the first piece of his much discussed shift in US trade policy - and foreign relations altogether - from multilateral dealings to one-on-one bilateral creeds.

It also crushed the the centerpiece of President Barack Obama's "pivot to Asia," which was lambasted along the campaign trail on both sides of the aisle, severely weakening its popularity in Congress well-before Trump took office.

Even those who favored the agreement knew the deal, which was years in the making, was essentially dead for some time. Trump's signature merely served to date its tombstone.

"The fact that all that effort has come to nothing is really quite infuriating," Lee Branstetter, a Carnegie Mellon University professor who served on Obama's Council of Economic Advisers from 2011 through 2012, told Business Insider.

Branstetter, who in his Obama administration role was involved with the deal's negotiation, said he wants to see what opponents of the agreement between the US and 11 Pacific Rim nations would provide as an alternative.

"It's easy to criticize," he said. "It's a lot harder to produce a better alternative - something that the country and the new president is discovering every day."

But Trump's worldview, as he's laid out, is one in which the best potential deals happen between two nations, not between a "mashpot" of countries. Similarly, he's criticized other such conglomerates as NATO, the European Union, or the United Nations.

In his speech at the Republican congressional retreat in Philadelphia late last month, Trump praised his withdrawal from TPP, saying it paved the way for "new, one-on-one trade deals that defend the American worker."

"And believe me, we're going to have a lot of trade deals," he said, before jokingly telling Senate Majority Leader Mitch McConnell, an earlier supporter of TPP, that those many deals would happen soon.

"I think it's going to be challenging to overstate the possible consequences if it plays out how the president clearly says," Patrick Skinner, director of special projects at The Soufan Group, which provides intelligence services to multinational bodies, told Business Insider. "He's not hiding his intentions. His worldview is bilateral."

"And so, I mean TPP was already dead, but the way he officially made sure of that, and then says we're going to do these bilateral deals - countless bilateral things - that's bad enough for trade because globalization just doesn't work that way," Skinner added. "It hasn't for a long time."

Skinner said that "everything" in the aftermath of World War II "has been moving away" from those one-on-one type dealings.

Joshua Meltzer, a senior fellow at the Brookings Institute, said there's one key issue underlying the withdrawal from TPP and the promised move to bilateral relations.

And it's that "this is the first administration that utterly misunderstands trade," he said.

"I mean they've just got it basically and utterly wrong," Meltzer said. "Peter Navarro (White House National Trade Council director), who has written specifically about the role of imports in the US economy is just wrong, flat wrong. I'm not the only person to say that, every economist on the right and left says the same thing. And so, Trump misunderstands trade and his economic advisers do."

"Now, it's one thing to craft a political strategy which sort of, you know, blames every single economic problem the US has on foreigners and international trade," he continued. "It's another thing to try and shoehorn that into his [governing] strategy. ... I mean if you believe that, the way you move forward negotiating trade deals going forward whether they're bilateral or whatever is going to be fundamentally different than every president before him."

What happened to the deal?

The deal, which had drawn much of its ire from labor unions, progressive Democrats, and the populist right, met its match when Trump and insurgent Democratic presidential challenger Bernie Sanders were delivering broadsides to it day after day along the trail. It played no small role in helping Trump secure victories in Pennsylvania, Wisconsin, and Michigan - long referred to as part of the Democrats' "Blue Wall" - over eventual Democratic presidential nominee Hillary Clinton, who disavowed the deal later in the campaign.

Congressional Republicans, who for many years were key in getting such agreements through Congress over the concerns of somewhat more wary Democrats, began to peel off as the campaign, and its protectionist rhetoric, kept picking up steam.

As the election was nearing, even McConnell and House Speaker Paul Ryan, who were known to favor the deal, began to express doubts about the agreement. Only a handful of Republicans were willing to speak out in favor of the deal, and Obama, sensing that the agreement was in danger, enlisted Ohio Gov. John Kasich - a 2016 Republican presidential challenger - to help get the deal passed. But it did not work.

John Kasich.AP Photo/Carolyn Kaster

Michael Stumo, the CEO of the Coalition for a Prosperous America, worked to defeat the deal, which he categorized as a "job killer" that would "increase our deficit" if passed. He said he began noticing growing opposition within specifically the Republican base prior to the election cycle really ramping up, when fast-track trade authority was passed in Congress.

"And, with our work on the hill and in the country after fast-track, we saw the opposition on the GOP side, which typically provided the majority of the votes, only increase," he told Business Insider, adding that it got to the point where his whip count showed there wasn't "really ... a road to passage had they voted."

For Branstetter, he believed it was a series of misunderstandings that shot down the trade agreement. He cited studies - including one he contributed to at the Peterson Institute for International Economics - that projected the deal would create more than 130,000 jobs and would raise national income by $130 billion.

"I personally have not kept count of all the jobs that the new president claims to have created by tweets, threats, and insults, but I'm pretty sure it does not yet add up to 130,000, and those are the jobs we just lost," he said.

He labeled resentment from the Trump coalition as "inchoate anger" stemming from incomes not having substantially risen for the bottom half of the US income distribution over the past half-century that for the bottom half of the US income distribution, incomes have not raised over the past 50 years.

"Free trade agreements are just one thing they associate with their declining economic circumstances," he said. "But this is sort of an emotional reaction rather than something that is carefully laid out."

"There's a general consensus that Trump won because there are a lot of blue collar workers throughout the country who have been displaced, or feel that they have been displaced by low cost imports and manufactured goods from outside the United States in recent years," he continued. "And so they want Trump to do something about it and don't feel the center right or center left has done anything about it."

Branstetter said there were groups, including labor unions, who "sort of systematically overestimated" the impact of the agreement on manufacturing.

The deal was routinely criticized for not doing enough to curb currency manipulation, and many progressives believed the agreement would alter the rules of international commerce in a way that disproportionately favored the interests of large corporations. In one specific instance, progressives targeted provisions in the agreement that were aimed at protecting the pharmaceutical industry from competition by strengthening intellectual property rights in the member countries.

In addition, another aspect of the deal that caught disdain from those on both sides of the aisle was its investor-state dispute settlement provision, which gave corporations the power to sue governments outside of traditional legal channels and before a tribunal. It was attacked as undermining national sovereignty.

Branstetter downplayed both complaints. But, he did say it would've possibly done the administration some good if "a little more sunshine" was brought to the negotiating process.

"I mean, it's possible we could've done more to explain what was at stake than what we did, but I think the administration put forth a good effort," he said, adding that the more secretive nature of the proceedings were necessary to help insulate some of the leaders of the member countries from domestic political pressures.

"That was done for a practical reason - we wanted to get the best deal possible," Branstetter continued. "And that deal may be hard to negotiate if everything is being disclosed."

But drafts of the eventual agreement "leaked out anyway" and quickly became "fodder" for the exact criticisms many were seeking to avoid, he said.

Barack Obama.AP Photo/Carolyn Kaster

"So maybe in hindsight, the lesson to take away is you may need ot bring a little more sunshine into the negotiating process at an earlier stage," Branstetter said. "Maybe that would've countered this perception that there were these backroom deals that wer being negotiated in these smoke filled rooms between governments and corporate interests."

Still, Branstetter targeted members of Congress "who knew much better" for not speaking out on the deal.

After Trump signed it away, Sen. John McCain of Arizona was the lone prominent senator to issue a statement rebuking the move.

"I'm more than a little outraged that congressional Republicans ... did not do more to protect their constituents," he said. "As Trump ahs gone on to all kind of other stupid things in the trade policy arena, the relative silence on this issue from the congressional leadership is appalling."

"I mean, the US position as a responsible part of - even leader - of an open global trade and investment system, something that generations of American leaders have worked to build and protect ever since the Franklin D. Roosevelt administration, this is being trashed by the president of the United States and the congressional leadership is silent. What the hell are they thinking. Or are they just pusillanimous cowards."

About that shift to bilateralism...

The US is no stranger to bilateral agreements, whether on trade or other sectors of foreign policy. But those agreements, as Meltzer said, are limiting.

"They don't pick up the dynamics of how the global economy works in terms of global supply chains, and they take a lot of negotiating power," he told Business Insider. "You have to do them one-by-one-by-one. And a lot of issues around agriculture for instance and around the internet for instance have limited benefits when they're done bilaterally and they really need to be expanded out."

In Trump's view, as he's explained on many occassions, bilateral negotiations provide the US with maximum leverage. Meltzer said that, "in some sort of very basic calculation," the president is correct in that assessment.

Chip Somodevilla/Getty Images

"But I think it's also the case that the United States is such a significant economy and such an important player that, if you look at the TPP context, I don't think anyone would suggest that the US could've done any better deals by doing agreements bilaterally with all 11 countries rather than in the TPP environment," he said. "When you add more economies, you can add more trade offs in deals. And so in some sense, that provides scope for sometimes better outcomes than if you're doing everything on a sort of bilateral basis. I think it's limiting."

Stumo, who was more than pleased the US got out of the deal, said he hasn't read Trump's comments to mean that bilateral negotiations will be "the only thing they're doing."

"I think they're rethinking what the content is of the things they're doing," he said. "My understanding is it's not multi-vs.-bilateral. It's that the US is the biggest economy with the biggest consumer market in the world, and when we go on a bilateral sense, our interests don't get subsumed because we don't have 10 other nations we're equal with and they're too many concessions."

Stumo added that targeting currency manipulation and figuring out what drives the country's trade deficits will be critical to creating "improved trade." And, he said, the US hasn't been able to properly deal with the protectionist policies other nations have in place.

One nation seems poised to capitalize

The biggest early winner of the deal's dismantlement is China, a country experts said is moving quickly to capitalize on the United States' newfound protectionism.

In a surreal speech in front of the annual gathering of the world's economic elite in Davos, Switzerland, last month, Chinese President Xi Jinping painted his country as the bastion of globalization. And that was in the days before TPP was signed away by Trump.

"TPP was basically the US with 11 other countries against China," Skinner said. "I mean not in a really confrontational way, but it was a trade block to kind of leverage sides. It was to counter China's rise. The Asian countries are now pivoting to see what they can get with China."

Still, Skinner said China may not have even wanted TPP to fall apart, since, as he said, "they prefer to gradually and slowly increase their influence through soft power."

Xi Jinping speaks in Davos.World Economic Forum

Branstetter was less sure of that assessment.

"So we had the opportunity to set the rules in a way that would protect US interests," he said. "And that opportunity has now been thrown away. And China has lost no time making overtures to all of our former TPP trading partners, basically saying, "Hey, there's a lunatic in charge of US trade policy and we're basically the only game in town now, so you kind of have to deal with us.'"

"The rules by which Asian trade is organized will be rules that promote Chinese interests more than US interests," he continued, adding that the result it "a real shame."

As a result, Meltzer said the US "lost their seat at the table" for shaping Asian trade investment rules "for the next few decades.

"It really undermines faith in the United States to follow through when they do choose to show leadership," he said, adding that it does create a huge window for China to capitalize.

"So it's a quite astounding self-inflicted wound that Trump has inflicted on the United States on day one of his presidency, he continued.

But, like Skinner, he tapered his view on just how far China would be able to go, citing the domestic challenges for a nation with its system of government to become a world leader in the same sense as the US.

"There's a lot of hesitation amongst people in China for taking that role and the costs and all the rest of it," he said. "The domestic and political challenges they face also i think they could constrain their role. But you can see clearly from that speech they see the opportunity has presented itself. And I think that they will do their best to make the most of it."

At home, a potentially profound effect

The immediate impact, Branstetter and Meltzer said, is the lost of the projected jobs and net-growth from the deal's implementation. And, they said, the longterm reputational blow is another disastrous side-effect.

Branstetter was virtually hopeless on what the future of US trade relations with other nations would look like following Trump's decision to withdraw from TPP, coupled with his promises to throw tariffs and tariff-like policies on countries such as Mexico and China. That, he said, would be sure to be met with counter-retaliations that would be "reasonably damaging" for the US.

"I feel like President Trump has almost locked himself into a belligerent position," he said.

Donald Trump.Getty Images

As an example, Branstetter said China could potentially decide to stop buying planes made by Boeing if Trump imposed one of the tariffs he suggested to help explain what could happen as a result.

"They don't have to buy Boeing airplanes, they could buy Airbus airplanes. That alone could cost thousands of jobs," he said. "So I don't see how we could avoid seeing manufacturing job loss accelerate in the United States as Trump either declares his trade war, or because he's sort of backed himself into this belligerent corner, we see an escalating round of trade skirmishes that may not add up into a trade war, but they can cost us a lot."

Branstetter continued, laying out the grim scenario he believes would be likely to play out if Trump and Congress go full-steam ahead on the trade, tax, and spending policies that have been outlined.

The big tax cuts that are planned, coupled with Trump's hope for an infrastructure stimulus, Branstetter explained, will be certain to accelerate economic growth and corporate profits in the short run. But there would then be an "economic cost" felt on the trade side.

"A fiscal stimulus, implemented when the US is already close to full employment carries with it the threat of inflation," he said, predicting, "To counter that, the fed will keep interest rates high. Higher interest rates will drag lots of foreign money into the US so they can earn higher interest by owning dollar denominated assets, as that money flows in it will bid up the value of the dollar, and that will make everything made in America more expensive."

It would lead to a massive Reagan-era trade deficit, Branstetter contended, expecting that it would, ironically, contribute to accelerated manufacturing job loss.

"And I just don't know how long it's going to take before Trump supporters in the midwest wake up to what's really going on," he said. "But I think eventually they will. And when that happens, they're going to be really pissed. Because nobody likes to be conned. And nobody likes to realize that they've been conned."

It could lead to the "political pendulum" swinging in favor of the Democratic Party in 2018 or 2020. Or, he outlined, there's another path.

"Another possibility is that our Domestic politics become even more polarized, even more fragmented, and even more emotional," he said. "And, gee, doesn't that remind us all of the 1930s in Europe."